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Old Man Coal Getting Mugged by Cheap Gas

April 9, 2012
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Natural gas and coal producers have a couple of gripes in common: mild weather and high stockpiles of both commodities. But they're not likely to be seen drowning their sorrows together as gas continues to undercut coal on price and swipe market share among power generators.

"Increased fracking activity and the rapid expansion of new natural gas plays are providing power generation utilities a lower-cost alternative to coal," wrote RBC Capital Markets analyst Walter Spracklin and his team in a note last week. "With natural gas prices currently about $2.05/MMBtu, we have seen significant switching by the eastern U.S. utilities from coal-fired electricity production to natural gas-based production."

Looking at the Nymex futures strip, Spracklin wrote that he expects natural gas prices will remain depressed -- in the $2.49/MMBtu area -- for the remainder of this year. This is "a strong indicator that coal demand will remain depressed for the foreseeable future."

In the East, fuel-switching among power generators has already occurred as the region sees a flip to natural gas when gas prices are about $3.75/MMBtu (and as high as $4.25/MMBtu for some less efficient plants), Spracklin wrote, citing research by RBC's utility analyst. "As such, much of the switching in the eastern U.S. is already completed since natural gas prices first dipped below the $3.75 level in October 2011."

However, to the west, where utilities are served by Powder River Basin coal, the switching trend is less mature. Plants here begin to switch from coal to gas when prices are $2.50-2.60/MMBtu, according to RBC. "Obviously, given where natural gas prices are today, we are beginning to see this switching in Texas and elsewhere begin, and we expect the pace to pick up over the next few months," Spracklin wrote. "All in, we believe low natural gas prices are likely to weigh on coal demand for some time."

Spracklin wrote that switching began in 2009 as gas broke below $4.00/MMBtu in the early part of the year. Coal had already been reeling from the effects of the financial crisis. The latest dip in gas prices has prompted more switching.

"Coal volumes held up fairly well through the end of 2011 but have declined steadily since then as a prolonged outlook for extremely low gas prices has led utilities to switch away from coal."

Besides getting beat by gas on its way to market, coal also is taking it on the chin from Washington, DC, where the Environmental Protection Agency is pushing on multiple fronts for lower emissions from power plants, which makes things tougher on coal all around (see NGI, April 2).

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